After fighting our way through unforgiving traffic, we squeeze our way into the parking garage entrance of the mall – the gap of dusty air between the unfinished wall on the left of the car and the shaky bamboo sticks on the right side of the car. These bamboo sticks probably bear the weight of the entire building. We shudder at that thought but move on to the fun and games of a weekend at the mall.

Gold at the mall
Once inside the air-cooled environment – with some relief from the dust – we let the children run up and down the escalator. I remind myself to write a letter to the Ministry in Charge of Sports and Promotion of Youthful Exercise and Better Daily Habits to consider introducing a new sport in the Olympics, the one which India plans to host in 2020. (Please read – A 2020 Olympic). “Dear Sir”, the letter will read, “Please can you introduce the Escalator Race in the 2020 Olympics which your esteemed organisation will be hosting. It is possible that a child from India may win a gold medal in that sport.”

An interesting statistic: students (former and existing) of Stanford University in USA won 25 Olympic medals in China, of which 8 were gold, 13 were silver, and 4 were bronze. If Stanford were an independent country, it would have ranked as the 9th in terms of gold medals won and 11th in terms of total Olympic medals won. Stanford, by the way, probably has 15,000 students and maybe 500,000 former living students of all ages. Probably 50,000 are US citizens of the “Olympic relevant” age. India – with the 200 million young people (the “Olympic relevant” age) that Goldman Sachs wrote so excitedly about in their BRIC report – won 1 gold medal and 2 bronze medals for a tally of 3 medal – ranking at 50th. Well, that is a start.

But, we were talking about the weekend. Yes, the joy of letting your children run around in an air-cooled mall and then buying them a few cookies or an ice cream. And watching young teenagers on their first awkward date – they walk around and eye each other like peacocks in a mating dance. And nodding a weak “hello” at other parents who also bring their children to play around in the mall.

Yes, the Indian mall business is booming. Though not as a place where people spend money, but more as an air-conditioned garden. Many politicians took the land owned by municipalities for building schools and playgrounds away from the people. They were sold or auctioned off for commercial buildings and malls. In a twist of fate, those malls have become playgrounds again.

Mall mauled
Look around you and a typical mall and count the number of shops with people standing in front of the cashier line, ready to pay for a purchase. Look around and count the number of people with shopping bags in their hand. Are those bags large and fall, or small and light? Hmm, we spent two hours in the mall and bought ice creams and cookies. Add the parking bill and a typical family spends Rs 200 in 2 hours. Maybe the mall developers should consider leasing their empty buildings back to the municipalities and convert them into playgrounds – a few slides, see-saws, swings, and some sand and mud would do the trick. They could always work out a Build Operate and Transfer deal which would push the losses of the malls built, now running up a huge operating loss, back to the municipalities. With some innovative agreements, they could even make a profit from the over-built and ugly malls that they have constructed. But the death of the Indian real estate bubble – ready to crack in November – is not the subject of the story.

History, said Henry Ford, is more or less bunk. And so we stand here looking at the charts of the BSE-30 Index and wondering what will happen next. A few weeks ago, the Index was at 12,000. On its way – said the technical chartists – to 9,000. Well, it may have missed a few turns and misread the signs – the Index now stands at the 15,000 levels.

For today; for now. The chartists may be right. The Index could head south and break through the 12,000 barrier and slip to 9,000.
Maybe. Maybe not. There is nothing in the rule book that says share prices must fall in a straight line.

We turned to our review of the fundamentals of a company. The things that tell us what businesses are worth, how much the businesses can earn, what are the various costs of the various raw materials, and what sort of selling prices a business can get for its products or services.

The fundamentals tell us that the companies are undervalued. Not all the companies are in the Index. But many companies are undervalued. According to the fundamental analysis the share prices of these companies should be higher. Should be. Could be.

There is nothing in the rule book that says share prices go up in straight line. Obsessed with the future, we turn to history. Can the past be a guide for the future?

And there is only one other topic – like finance – that is regularly broadcast on TV stations. Where sound bytes are constantly bombarded which, ultimately, may not tell us much. And that topic is the art of the weather forecast. Predicting the direction of the stock markets is probably as difficult – and embarrassing – as predicting the weather for tomorrow in many parts of the world.

Sunny Florida
Florida is one state in the USA where forecasting weather patterns is a challenge. The state is less than 150 miles wide in most places. It has the Atlantic Ocean on its eastern coast and the Gulf of Mexico on the western coast.

While India has its monsoons, Florida has its hurricane season. Winds are formed somewhere between the continents of Africa and South America. These winds move in a north-westerly direction towards Florida. As they pass over the warm ocean waters, they gain in strength and can form a Tropical Storm (wind speeds of 39 to 73 miles per hour). These storms can turn nasty and become hurricanes with wind speeds of 74 miles per hour (a category 1 hurricane) to wind speeds of 156 miles per hour (a category 5 hurricane).

The good thing about hurricanes is that you know they are coming. Earthquakes just happen – you can’t really do much about it. You can plan for an evacuation long before a hurricane comes your way. An earthquake? Just stay in a safe place and pray.

So tropical storm Hanna is on its way to Florida. The National Hurricane Center has projected a path of where the storm is likely to make landfall. The colour of the hurricane “dot” indicates the speed of the winds.

Or how many of us “knew” that the Index would decline from 20,500 to 14,000 in 6 months?

I am guilty of not “knowing” but, in defence, we did worry about the markets being frothy based on speculative buying from so-called FIIs. I expected that the markets could decline maybe 10% to 15% – but not 35%. We figured that real estate stocks may correct – some really sharply, while the quality stocks would decline a little less. Everything got hammered.

We thought gold would rise – it did, but not as much as we thought it could.

One did not “know” many things – and it is unlikely we can “know” much about the future. But we can certainly try to take a view on where the future could be headed and how we can position our investments to profit from some trends.

So, I look around to see where I can get clues to what the future may bring.

Future-telling.
CNBC has little to offer. Their definition of the future is end of the trading day. Nothing wrong with that. But it is a time horizon and an “investment” style that does not appeal to me. Gambling in the stock markets sounds like a lot less fun than flying off to Macao or Las Vegas where you can feast your eyes and your stomach while losing all that money. But given the popularity of CNBC, it obviously is what people want. Not that it makes it the correct thing to do.The newspapers are a little generous: their definition of “long term” is between one week and one month. That is the time it takes me to start planning a meeting with a company’s management to begin our evaluation of the stock.

I look to the chartists for help. Not much there, either. They can probably tell me where things may trend on a daily or weekly basis – and the graphs and charts really look nice.

So, I turn to history. Keeping in mind the Buffett warning: if past history was all there was to the game, the richest people would be librarians.

But – to counter Buffet – what if there was a librarian out there that did actually read all that history which they collect and tabulate; and then had the ability to forecast the future based on a past trend? Surely, there is something in the history books.

Past-looking.
I turn to history and begin with the growth rate in the Indian economy as defined by the growth rate in India’s GDP.

The data indicates that – over the 28 year period from 1980 to 2007 – the rate of growth in real GDP was 6.2% per annum. The “real” means after inflation – after the fake increase in wealth caused by an increase in prices.

I add back inflation – which averaged about 7% for the past 28 years. This allows me to get a sense of how the Indian economy grew at “nominal” prices. Combining the two, I broadly see that the Indian economy grew by more than 13% every year for the past 28 years. Not bad. And the BSE-30 Index increased by 18% every year since 1980.

That is the past. A solid growth rate in GDP: 6.2% per annum. Inflation at 7% per annum. Stock market returns in blue-chip companies at 18% per annum – better than any “AAA” grade bank deposit or fixed deposit. But what does the future hold for us? And can we come to any conclusions based on those expectations?

Looking over the gloom.
By all accounts, India’s economy is set to continue its growth. The biggest risk is that a Left government comes into power and – by some strange reasoning – does not mind the fact that their masters in China and Russia grow their economies but shut down India’s economy. So that is a risk. A real risk.

Barring this risk – and I do not think anyone should ignore it – it would be sensible to assume that India’s GDP can clip along at a 6.5% rate of growth over the next 10 years. And inflation will still be somewhere around 6% per annum. Add them up and we see a “nominal” growth of 12.5% each year.

While a growth rate of GDP is not a guarantee that stock markets will increase every year, it is safe to assume that higher economic activity should see companies making some higher level of profits – and some higher level of share prices.

Markets, as we know, never rise -or fall – in a straight line. They zoom and zip all over the place. We had an incredible run between 2003 and 2007 when stocks increased by 5x in 5 years – not going to see those kind of returns in a hurry! But, that zoom was part of the 18% per year over the past 28 years – which means that there were years when stocks did nothing. Or even lost value. Just as they have done since January 2008.

The key to remember on stocks is: be in it for the long term. Put your savings there. The only time you need to worry is if stocks are going down at the time when you need your money back. Otherwise, every fall in share prices of good businesses is a chance to buy more. Keep ploughing any excess cash you have back into the various assets you have: fixed deposits, stocks, gold. In a proportion that matches your needs and your risk-taking appetite.

If the market wallops you and the value of your holdings go down – try and add more. People tend to do the opposite – they get scared. They withdraw. Yes, you should be scared – if you bought the wrong business. Or even the correct business at the wrong stock price.

And that comes to another crucial reminder: you are not buying the stock; you are buying a portion of the underlying business. The stock market puts a value on the business every day. Mostly an illogical valuation. Another Buffett gem of simplicity: if the business does well, the stock eventually follows.

There is a lot of gloom and doom in the markets now. The key is to understand the underlying fundamentals and trends. To make assumptions and position your portfolio. One may not “know” but one can try to decipher. And, another quote from Socrates: “I cannot teach anybody anything, I can only make them think.”

Turn off the TV, keep the newspaper aside: and think.

Source: Looking back, Thinking Forward

For decades, the Indian brain was obsessed by Pakistan. Everything Pakistan did, India could do better – and bigger. Sometime in the late 1990’s there was a switch. India’s political masters (actually, uh, do any exist?) were no longer obsessed with Pakistan. There was a new neighbour, China, which needed to be emulated.

So 2020 it is. That is the year when India wishes to host the Olympics. I am not sure what the Indian Olympic Committee has in mind but, based on recent travel experiences and on reading about the state of the Indian landscape, it is fair to say that India has what it takes to win the bid as host country.

We have the singing talent for sure. There must be a dozen TV shows that are trying to find the next singing sensations. The dance steps and the voices of these 10-year olds will certainly win us the support of the selection committee. And unlike China, India has a population that knows how to celebrate – with or without fake fireworks.

And if for any reason the Left calls a national strike because the Indian Olympics were not hosted in their capital city of Beijing, the software companies can probably simulate the entire Olympic Games as if there was no strike. Who knows, some Indian company may earn the IPR (intellectual property rights for those of us not in synch with the new global language) for a new, virtual 20/20 Olympic Games.

But what if there is no strike by the Left and they actually begin to behave in a constructive manner? And they actually feel proud that India can do something better than China – like building nuclear power plants? What if the reds give the green light and signal a “go ahead”?

Does India have the stadiums to host all the games? And the places to stay for all the sports people and the visitors? Sure, not an issue.

There will be enough tracts of land which were cleared of one million trees and rice fields for the SEZ projects. By 2020, these SEZ projects will be failed entities taken over by the Board for Industrial and Financial Reconstruction (BIFR). For a nominal rent, the BIFR would allow the Indian Olympic Committee to rent these 220 SEZs and re-name them as Sports Entertainment Zones. Some of these can be SEZs can be used for the fields where the events can be hosted and some can be used for cities built of tents. All very eco-friendly and no NGO will call for a boycott of the Olympics.

Swimming pools? That is the easiest part. The BMC is very good at ensuring that the streets of Bombay are flooded every monsoon. The additional construction in many parts of Bombay is taking place at the cost of a natural drainage system. The mangroves are being knocked down. The natural river outlets to the sea are being reclaimed. So, by 2020 the flood waters will be even higher – good for diving and good for Mr. Phelps’ children to try and better his record of 8 gold medals. Bangalore, Pune and Hyderabad are also contenders to host the swimming events.

All the 600 malls that are being built for the great Indian retail consumption story will also be empty – and owned by the BIFR. So, the BIFR can collect some more rent for allowing this space to be used as dorms with a shared bathroom service. They will all be air-conditioned but – in keeping with the eco-friendly nature of the Olympics – the air-conditioners will not be used. The real reason, of course, is that India will still be short of power in the year 2020 with 12 hour blackouts a fact of daily life. (Before you trip me here, there will be priority for power usage given to the servers that simulate the Olympic Games – just in case the Left parties call for a national strike.)

The 50 to 100 million square feet of commercial space being built for ITES and back-office companies will also be empty. Their open floor plans will be good for games like badminton, table tennis, archery, and shooting.

So, India can have a very eco-friendly Olympic in the year 2020. Think about it – the first Olympics were also run without power. And they had no grand stadiums and 5-star hotels for visitors and for the sportsmen. These luxuries like air-conditioning, sponsorships, and television rights are all the inventions of the demons of modern science and the wicked ideas of the multinationals.

While the world celebrates the handing over of the Olympic flag from Beijing to London (the host for the 2012 Olympics), the silent revolution will be when India wins the 2020 Olympics and – with great foresight – shows the world how to live in an eco-friendly environment.

By the way, if BIFR ever becomes a listed entity, buy the shares big time – and wait for the rental income to pour in. At current valuations of many of the listed companies that deal in unreal land grab schemes, BIFR may be more “real”.

Source: A 2020 Olympic

Accepting, I guess, means not going against what is given. If there is corruption all around us, accept it. Better still, say some, be part of it and profit from it. Even better, say the most forward looking sages, import the corruption from anywhere in the world – duty free – and implement it here. “Corruption”, observed the astute Mrs. Indira Gandhi “is a global phenomenon.” Accept it.

If there are bad practices in the US, import them into India. After all, we live in a globalised world.

Testing reforms.
And so the Reserve Bank of India’s review of the banking policy in April, 2009 is now seen as a litmus test for “reforms”. As is the supposed review of the foreign ownership limits in the insurance sector. The easing of foreign ownership rules, say the enthusiastic followers of “acceptance”, is what will propel the Indian economy to a new level.

It may. Most likely, it will propel much of the Indian banking system to a new level of bad practices. The people we wish to bring into India as large shareholders in the Indian banks are not saints. That is a fact. And while they may have not yet been convicted as sinners, they have certainly been proved to be proponents of greed.

Banks are supposed to be institutions that are devoid of greed. They are supposed to measure risk and take risk away from the system. Greed – and rewarding greed – is a very un-banking thing to do. But the world is now faced with economic uncertainty partly because banks forgot their religion and worshipped market share.

Much of the developed world has a bill of USD 400 billion to pay because the banks – and the employees they nurtured and promoted – forgot their duty. And there is an estimated additional USD 600 billion of write-downs and losses from bad loans on its way

For some reason, the India-watchers are hoping that the RBI will allow the foreign banks to buy more shares in the Indian banks. Such a move, they claim, will show that we are serious on reform. Really?

Why would we celebrate the arrival of banks and financial institutions that failed in their basic business of assessing and pricing risks?

I can see why the poor property developers sitting on millions of unsold square feet of office space and residential projects are keen on seeing some new spurt in vanished demand. Maybe all their press-plants of how strong the property market will finally hold true. A new banking ownership law will lead to some extra demand.

And I can understand why a few thousand individuals who are unlikely to see any huge bonuses this year – or any doubling of salaries – would like to see a new source of talent hunt. This will trigger a round of wage inflation that will make the awards of the Pay Commission look pale in comparison.

But, on a serious note, what is the benefit for India in allowing people who have yet to prove that they can be “bankers” to own and control banks in India?

Will they teach their banks the own in India how not to be bankers? How to lose sight of risk and focus only on return? How to lose billions?

True, the Indian banking system is not perfect. There are some really large banks that have raced to become large focused on market share. They have acted in a manner that is at a risk to the definition to the word “banking”. Rather than letting the aggressive banks move into India, maybe these banks – and their management teams – should be sent to the US, UK, and Europe where they will fit in with the prevalent definition of “banking”.

Insure your commission
Allowing global insurance companies to own a large stake in Indian insurance companies is another big banner of the reform flag. For general insurance – the business of insuring oil rigs, pipelines, power plants, and factories – one can see the merits of spreading an India risk in a global basket.

And I am not sure why this is a good thing for the life insurance side of the business. The policies are sold to local Indians. The liability is to local Indians. The currency of use is the Indian Rupee. Actuaries have based their calculations on the lifespan and health factors for local Indians. The money that is collected is invested in local rupee assets to be paid out to the local Indians when they retire. How does a foreign insurance tie-up with a majority equity stake – or any equity stake – help?

Oh, yes: they will improve the reach and they will being new marketing skills.

That is why the insurance industry is facing the largest amount of churn on record. The marketing geniuses are mis-selling products to gullible investors.

Up to 40% of the premium earned in the first year on many products is paid out to agents. One of out six policies sold by the more aggressive agents “lapses”. The poor policy holder probably can no longer afford the product or realises they were sold something they did not want. If you buy those cocktails – spiked to give your portfolio a high – called ULIPs, then one out of five “lapse”. All this with a 26% ownership equity level by the foreign insurance companies. What could happen when insurance companies are 51% owned by foreign entities?

There is nothing sacred about these large foreign insurance companies, they are mortal. They have made mistakes. They have committed practices that their home regulators have frowned upon. In 2001, many of these biggies were in trouble: they lost control over how they had invested their portfolios. Some of them have already announced problem investments in this current mortgage crisis.

On the health insurance side, studies in the US have shown that patients are spending about USD 130 billion a year on tests that are deemed unnecessary. A function of a doctor-pharma-insurance world that works in a “defensive medical” environment. No one wishes to get sued so everyone is happy making the patient spend more – it all gets recovered from higher health insurance premiums. That means, from you! And India is “reforming” its way to this model. Higher medical health insurance premiums are here to stay.

As for reach: they are reaching deeper into your wallet for sure. The real reach of covering more Indians is still being done by the likes of Life Insurance Corporation.

There is nothing wrong in allowing foreign banks, insurance companies, and institutions to own and operate companies in India. But we should know what we are importing. To think of an increase in foreign ownership as a plus for “reform” is stretching it. The reality of such a reform is that it will import not-so-good practices and India will pay a price for it. Then we will be truly global. And our desires will have been fulfilled.

Source: The “R” in Reform

So, while Abhinav Bindra rightly celebrates his gold necklace, most investors are mourning that the gold in their portfolios feels more like a leaden albatross around their neck.

Cheer for gold

Actually, in a very strange way, the price of gold declining is a good sign! When the price of gold increases, it means that the financial world is in trouble. When there is trouble in financial markets, it generally reflects some problems in the real economy, in the underlying businesses that make up GDP.

That is not good for investors because most of us have our investments in mutual funds or shares. Some of us have investments in property – in a second home which earns a rental yield. In “bad” economic times, the value of our holdings in shares, mutual funds, and property tends to decline.

Sometimes sharply.

Witness the (-)40% decline in the BSE-30 Index from its January peak to its lows in July. And witness the decline in property prices in most parts of the country and a collapse in the volume of transactions in all parts of the country.

Evolving views on gold

Initially, the reason and rationale for buying gold was purely based on the price of samosas, oil, and property prices (Please read – Of Samosas and Gold). The central banks of the world, I argued, were printing so much money that they had created what is called asset-price inflation. All that money printed is more than the new availability of goods and products so the price of the existing goods and services were increasing. Samosas, oil, and property prices had reacted to that “increase in money supply” as the economist call it. Gold, by this measure, should be over USD 3,000 per ounce.

There is another reason – sort of linked to the first. When governments print all this money and debt levels of countries head northwards, people lose faith in that currency. They can buy many samosas and barrels of oil right now today to be consumed in the future.

But since storing samosas and oil for a long time is not really easy (try and freeze the samosas and see what a daily 6 hour power cut does to the edibility of the samosa!), people would turn to a historical store of value – gold.

Gold has been the currency of the world (as has silver to a smaller extent) till the financial wizards created the “fiat” currency which was backed by gold. And then the financial shenanigans began and the currencies were no longer backed by gold but by a fraudulent “In God we trust” printed on every note. Politicians, god men, and financiers have one thing in common. They all have used the “God” word to fool everyone.

People, I surmised, may start heeding the words of The Who “we won’t get fooled again” and start buying gold. In paper they would lose their trust. In God and gold they would keep their faith.

Not out of the woods

The world has seen some pretty scary jolts in the past one year. The Bear Stearns funds announced their meltdown about one year ago and that brought to the surface a lot of crap that was shovelled under the mortgage markets and global investments in real estate linked paper. Banks are likely to see losses of USD 1 trillion (about the size of what all of India produces in one year). So far the banks have declared losses of USD 500 billion. We are at the halfway mark of a long tunnel.

Stock markets like to look ahead. Like an irritant child in the back seat they keep on asking “Are we there yet?”
Like parents-on-the-edge, we keep on saying “Soon, please wait patiently” and then – on the edge of a temper flare-up we lie: “We are nearly there”. The child shouts “Yippee”. So the central bankers tell us we are nearly there. And the stock markets shout “Yippee”.

And gold gets thrown out.

Just like that child’s toy game which kept him busy while he was in the car.

Now that the playground is not too far away, the child throws out the toy. Uh, oh. Parents sometimes speak the half-truths. Central bankers don’t really say much but when they do, it may not be the whole truth. If they did, they would frighten you. “No, my son, we have another two days of driving to get to the playground. Hold your urge to get to the bathroom.”

No, dear investor, the world is not calm, and it is not safe to head out into the open sea to swim. They have not taken care of all the monsters and sharks that lurk out there. There are many people in the world who have lived beyond their means. They have borrowed; they are leveraged up to their necks. They will default. The banks have only felt one pain so far – the mortgage mess from declining real estate prices. The credit card mess is yet to hit them. The personal loan stuff is yet to show its ugly head.

Rising dollar

Gold is down because the US Dollar is strong. The dollar is rising because its alternatives are:

1. The Euro – a currency zone that is so confused about which direction to head in, that it can never be an alternative to the Dollar.
2. The Japanese Yen – a currency of a country that has done nothing for over a decade and stumbles along in past glory on past wealth
3. The British Pound – what can you say about a country whose favourite food (Indian) is not even made in that country? Less said the better.

The botanist, Robert Brown, is credited with discovering the random nature of movements of particles. To witness it, stay in a room with the curtains drawn closed. Then allow a little bit of sunlight to peek in – and watch the particles in the air dancing around with no pattern. That lazy, tuneless, rhythm-less, and totally unpredictable movement of the particles is described as Brownian movement.

Watch those particles in the sunlight again. Now move your hand from right to left in one fierce stroke. Observe the movement of the particles. Then wait for the particles to come back to a rhythm of randomness. Now move your hand from left to right in one fierce stroke. Observe the movement of the particles. Wait for the rhythm of randomness. Now wave your hands many times in any direction you wish. Observe the movement of the particles.

All one can see is what Brown observed: nothing can help us predict how particles will move in the next instant.

In motion

And so it is with the Indian stock markets. It moves in directions that few can predict. When more people are buying shares than there are people selling shares, the markets rise.

When more people are selling shares than they are buying, it declines. Those are the obvious effects of demand and supply. Like when you hit the particles with your right hand they will all swerve to the right but then, in a while, get back to the random movement.

But why do people buy and sell? What makes them act? It could be global cues, it could be local cues. And what makes those global cues important – or the local cues important? No one knows.

All of us “experts” have theories, opinions, views, formulas. Few survive the vicious movements of stock markets – over cycles. We can all be right for some time; rarely can we be right all the time.

It would be safe to say that the stock markets are in a Brownian motion when observed on a daily, weekly, or monthly basis. They move in any direction.

Experts and TV commentators know nothing. Their random statements try to match the random movements of the markets. Mostly with embarrassing verbal noise.

An underlying foundation?

At a company level, though, we could argue that there may be some pattern.  Maybe companies that have good businesses will earn decent returns over time – and these returns will result in decent share prices. Maybe. There is no guarantee.

A new product may come along; a new competitor may emerge who does the identical business more efficiently; a company may make some silly move like a bad acquisition; or the management running the company may end up being a bunch of cheats.

Even companies, over long periods of time, may no longer “dominate” and may fade away and fall to the Brownian principle of random movement. So it is possible that General Motors (GM) can go bust. Or that Century Textiles and Bombay Dyeing fade away from memory.

Or Hindustan Unilever is not the “must buy” stock in an India portfolio. Or that India is not Indira and Indira is not India. Or that watching daily TV business channels is not important for making correct investment decisions in the stock markets. Or that oil may be replaced with some other source of primary energy over decades.

But we don’t know much of this till we actually see the results. When we put forth a hypothesis in 2006 that India’s GDP cannot grow by more than 6.5% per annum over a long period of time, we were seen as heretics. Worse: as investors who had “lost it”. By the looks of it, all the well-respected economists are now “downgrading” India’s GDP to this. A particle moving in one direction at a particular rate may not be able to move in that same direction at the same rate.

GDP of 9% per annum is not a given – it would be for some years if we whacked the economy with a right handed fist of investing more on infrastructure and education. Like we whack the particles: they move faster for a while. India needs that whack to boost GDP growth for the next 10 to 15 years.

And then, after a decade of strong 9% per annum growth, maybe the GDP will level off to 6%, then 4%, then 2%, then zero…Like Japan.

Steady in unsteadiness

Looking over time horizons helps put things in context, in my opinion. But, yes, a 50 year view may be less relevant for most of us individuals. Maybe a 5 year and a 10 year view will help us look at the companies and the economy as particles in a steady state of unsteady motion.

Not as the highly-charged, rapid-moving particles once you have just whacked them with your right fist. And you pick your stocks and the companies you wish to invest in. And switch off many of the TV channels. And float in Brownian motion.

The moral hazard of morality

Moral-bashing or moral-flouting is a dangerous occupation. My recent column (Going fast) spoke about laws and morals. Driving fast, I said, was not a good thing. Well, ironically, I now have a speeding ticket! My first such ticket in 25 years from what I recall! On a recent visit outside India a few months back, it looks like I was driving beyond some speed limit.

The high-ground is a dangerous place to occupy. The low ground seems safer! And the slow lane less expensive…. In defence, all I can say is that I probably did not know the speed limit or see the signboard. But ignorance, I guess, is no excuse. Oh, well….

Source:  Brownian Movement

“Going fast”, said my son as he rubbed his eyes “is not a bad thing.”

Those were his first words of that day.

He must have dwelt over the discussion we had the previous night on how fast he can ride his scooter.

“Speeding”, I had cautioned, “is not a good thing. You can get hurt, break your bones, and then no more scooter-riding for a long time.”

But that is the classic clash of a generational gap: the bravery of youth versus the caution of age.

And so it is in investments. The novice enters the stock markets looking for a quick buck. Many quick bucks.

The investors who have been burnt before, approach their investment portfolios with more caution.

Yes, it is enjoyable to zip down the slopes with the wind breaking through your hair, but….where are the stones along the path? Where are the bumps that can throw you off balance? Where is the other scooter that can come zipping down from any other side and zap you?

What if…oh, so many things can go “wrong”?

A seasoned investor is a worrier. But he can still be a warrior – brave enough to head out into the battle and seek investment opportunities.

And there are many investments out there which will make investors a lot of money.

Each have their risks, each have their bumps.

Assess them yourself – or pay an advisor or mutual fund manager to assess them for you.

Of course, everyone will make mistakes as we seek returns from our investments. That is the natural order of things. But, do we learn from these past mistakes? And have fewer errors of judgements in the future? Or, are we investment managers rolling the dice based on some “I still win, no matter what happens to your money” attitude.

External morality

“Where did you park your car” I was asked by my host – a “player” in the financial markets in New York where he worked for one of the largest financial firms in the world. He was in Miami, Florida for a holiday and had invited some friends over for dinner.

“Outside the building at a parking meter – but I need to go and fill in coins later”, I replied.

“Oh, that is okay – the fine for parking illegally is only USD 15 here. In New York the fine is USD 75, so I am more careful there”, he rationalised.

A good assessment of risk-return – and a price tab on doing the correct thing.

It is okay to park illegally in Miami because the fine is “affordable”.

It is not okay to park illegally in New York because the parking fine is higher.

And so it must be with many of my colleagues in the field of investments.

The advice offered could be based on, “what can I get away with?”

Not based on: what is the right thing to do.

But, is there a place for morality in investments?

The role for morality in investments.

I heard the Chairman of ITC give a very interesting speech on how ITC is helping the farmers and local people in villages. It was fascinating how ITC was trying to change their lives.

And then there was a question from a member of the audience: Sir, how do you reconcile the fact that ITC makes profits from selling products that are known to kill and hurt people and then using some of those profits to help some farmers?

The response was: ITC is doing less of tobacco products and we are diversifying into making food and other products. If we were to stop selling tobacco items, there would be hundreds of thousands of people without a job and no means of earning any money.

In essence: ITC cannot stop doing a bad thing because it is bad and its “badness” is pretty popular.

True, there is no law that stops tobacco items from being sold. In fact, governments around the world collect taxes on tobacco products (and liquor and gambling) and, in some sense, rationalise the “sin” of producing a “bad” product.

And now there are expectations that the recent win will allow the UPA to push through the unfinished agenda of reforms.

For example, there is talk that foreign ownership in insurance companies will be increased from 26% to 49%.

We have never understood what the advantage is to allow foreign companies to own any share in any insurance company.

They don’t have any special technology that we know of. Many of these insurance companies went bust in the 2000 and 2001 period. They did not price risk correctly. And they made excessive investment in stock markets. The 9/11 terrorist attacks and the subsequent meltdown in global equity markets strained their balance sheets to the hilt. So why should the allowance of a 49% equity investment in an Indian insurance venture be of benefit to India remains a mystery to me. And I am not sure why this is an indicator of “reform”?

But it could be an indicator of India’s willingness to take another bad foreign practice and dump it on our investors here. Just as we have imported the terrible practice of dumping high-expense, heavy-on-distribution-costs mutual funds to the innocent lambs flocking to the stock markets.

Or the ease with which we have let the Participatory Notes flood into India only to witness how short term hedge fund money distorted the stock markets on the way up – and now on the way down.

Yet another good example of “reform”, I guess. Dump another global disease onto a gullible Indian public.

Or take the foreign ownership of Indian banks. It was to be reviewed in April 2009. Now there is talk that this “reform” will be pushed through by the UPA. Wonderful idea, isn’t it? Read the news from the US, folks, you could soon have all those illegal and aggressive lending practices right here at home.
Made in USA. Imported into India.

Left alone

But please don’t brand my thoughts as “leftist”. I have little sympathy for a group that seems to be stuck in some time warp and still follows dictats that comrades in China and Russia laid out 50 years ago.

Oh, no: I am all for “reform”. But of the real, cleansing kind. Not the superficial foreign ownership kind.

If the UPA – or any government – really wants to “reform” the way insurance companies and banks are run, they need to let these banks and insurance companies compete with the private sector on an equal footing. On salaries, pricing of products, or introduction of new products.

Over the last decade, successive governments have drained the PSUs and made them poor – and enriched the private sector.
State Bank of India - if left to market forces – would never have surrendered so much ground to the competitive pressures from an HDFC Bank and an ICICI Bank.

LIC and GIC – if left to market forces – would never have given so much ground to the new breed of insurance companies.

And ONGC, OIL, GAIL, BPCL, HPCL could have had a crack to build what Reliance and Essar have built.

Instead, these companies have seen management talent drained, potential profits thrown away for the private sector to reap, and lost their competitive edge.

Bad policy and lack of real “reform” brought them to this situation, not lack of changes in laws of “foreign ownership”.

The PSU bloc has been left out of the “reform” process. It is time to get them back in.

Voting machine weighs in

The stock market, they say, is a voting machine.

Well, an interesting point: through the price movements of various shares, the market has voted on who is likely to win because of the new political alignments.

On July 23rd, the day after the UPA’s “better than expected” victory, the BSE-30 Index gained 5.94% and the NSE 50 Index gained 5.58%.

The Anil Ambani companies were the clear winners: 100% of the 6 companies profiled by www.equitymaster.com did better than the BSE-30 Index and the NSE 50 Index.

The Tata group came in next with a 35% winning vote.

Mukesh Ambani tallied a 33% winning vote.

The UPA, in contrast, came in with a 51% winning vote.

Our investment view has not changed

While the markets vote and the elected representatives vote, we still maintain the need for individual investors to buy low cost, simple investment products for the long term.

And if the “reforms” on foreign ownership of insurance companies and the banks do progress – hang on to your wallet. The distribution channels will be ready to pounce on you.

Source: Votes of Confidence

Rather, Mr. Warhol’s comment was about the short attention span that tends to rule the mind of most humans. Fifteen minutes, he surmised, was the extent of the human mind’s ability to stick with something.

But Mr. Warhol made his prediction in 1968 – before the invention of business TV channels. With a “24/7″ need to match the senseless tickers scrolling at the bottom of their screens, the media have to create famous people. And they don’t have 15 minutes to do it. The TV channels have about a minute to create a new “expert” and then move on to their next creation.

A roll-call of experts come and go on TV channels, telling us why things have happened and what will happen next. For fifteen minutes their words rule our mind. And then, like a soap bubble floating on the surface of a bathtub, their words pop into nothingness. This is because the listener and the speaker are both chasing their fifteen minutes of fame. The human investor, full of passion and emotions wants to hear something different. The expert, seeking his slot in history, is willing to provide it.

The media experts, seeking another fifteen minutes of fame, will happily change their statements – and make even more absurd statements – to grab the attention of the investors. For the next fifteen minutes of fame.

Strong currency becomes a weak currency

In the year 2007 – which actually was only some 200 days ago – analysts and rating agencies were all telling us how wonderful India was and what a wide golden road lay ahead for India. The Indian rupee, they concluded, would be a strong currency. The media, attracted to sound bytes the way a bee zooms in on a flower, were all over the expert views. Now, things are different. The new sound byte is how terrible the Indian investment environment is. And the Indian currency is doomed to die.

In the boom days (again, less than 200 days ago) respected commentators were telling us how the Reserve Bank of India was being too nervous about the high growth scenario – and the RBI was wrong in trying to reduce economic activity by sucking out credit from the system.

Today, these same experts are telling us that the RBI was sleeping on the job – they should have moved faster and controlled economic activity and suppressed the inflationary pressures. Maybe the RBI did the right thing and these experts were wrong – the experts had their emotions ruling their fact sheets.

India, we were told, has decoupled from the world. Now we are told that India is very coupled with the world – oil is the great re-coupler. Being in the de-coupling camp, I am keen to know what impact the buying habits and economic activity of a person in El Paso, Texas has on the buying habits and economic activity of a person in Nagpur, Maharashtra? Just because they both uses oil – at different prices, in different quantities, for different reasons? The act of using oil is not re-coupling.

Sensationalism

Sensationalism is in. Everyone wants to be known as the person who “called” the market. Bull or bear does not matter – the fifteen minute plug has to be captured. So, Fitch ratings “downgraded” India’s GDP growth rate to 7.8%. What a downgrade!

It is a “downgrade” the Japanese, the Europeans, and the Americans would have loved to see. With their GDP growth rates at 1% and 2%, the developed world economies would give an arm and a leg to hear that their GDP would grow by 7.8%. But, hey, who wants to be the hero in the arena when the lions will eat anyone who raises their heads? So, rather than write: “India’s GDP will grow by over 7% per annum and we believe that this sustainable growth rate will not be hampered by external factors like oil prices at USD 140/barrell”, Fitch gave India a thumbs down. India’s GDP was “downgraded”. They got their 15 minutes of fame.

The Index got knocked -4.6% the same day. Not all of it because of Fitch – we must not give credit where credit is not due. But that monkey in the human mind wants to hear negative things. And Fitch gave a spoonful.

The analysts who work for the brokerage houses loved the banking stocks – 200 days ago, in the year 2007. That was then. Today, they trash them in their reports. Because, globally, it is fashionable to trash finance companies and banks. The banks are in trouble around the world – so why should Indian banks be different?

HDFC Bank is rumoured to own bonds of USA banks and financial companies, never mind that they are not allowed to! We own HDFC Bank for our clients and watch in awe as it gets massacred. Sure, we hated the price they paid for the merger with CBoP – and still do. But knocking the stocks because they have some rumoured large exposure to US finance companies?

So, there it is: a potent cocktail of news channels that need views all the time. A billion Indians lined up to give their views on anything the channels wish to air. An investor base that is actually a speculator base, waiting for sell and buy signals.

What a nation of dead-brained zombies we have turned into; stampeding in senseless direction like a lost herd.

Source: Fifteen Minutes of Fame